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US long-term borrowing costs climbed to their highest level since late 2023 and stock futures fell on Monday as the stripping of the country’s triple A credit rating and progress on President Donald Trump’s massive tax and budget bill fuelled concerns about the government’s mounting debt burden.
Yields on 30-year US Treasuries rose as much as 0.13 percentage points to 5.03 per cent on Monday, narrowly exceeding a peak reached during the tariff sell-off last month and putting the country’s long-term borrowing costs at their highest point since November 2023. Yields move inversely to prices.
US equity futures for the S&P 500 and the Nasdaq fell 1.1 per cent and 1.5 per cent respectively. The US dollar slid 0.9 per cent against a basket of its peers including the pound and the euro.
The rise in bond yields comes after Moody’s downgraded the US’s triple A sovereign credit rating on Friday evening, warning about rising levels of government debt and a widening budget deficit. On Sunday evening, a congressional budget committee approved a tax bill from the new administration that is expected to further worsen the public finances.
Nicolas Trindade, a fund manager at Axa’s asset management arm, said the Moody’s downgrade was a “stark reminder that the US should not take for granted its ‘exorbitant privilege’ that enabled it to issue debt at a relatively lower cost despite a very high fiscal deficit”.
The moves will add to bondholders’ concerns over the sustainability of the country’s debt burden. The US and other developed nations such as the UK and France are coming under increasing scrutiny for the pressure that higher interest rates are putting on the sustainability of their debts.
“It’s another warning for a US administration already on bond vigilante alert,” said Pooja Kumra at TD Securities.
But the downgrade is viewed by analysts as unlikely to fuel forced selling of Treasuries by holders such as banks, reserve managers and institutional investors that rely on US government debt as the world’s biggest and perceived safest asset class.
Basel III rules for banks do not differentiate between any bonds in the “Grade A” category when calculating risk-weighted assets, so a downgrade from one rating to another within that would not force banks to sell Treasuries to remain compliant.
Central banks’ reserve managers are “unlikely to be affected by a ratings downgrade given their preference for deep and liquid markets”, said Barclays analysts in a note, while also predicting it would have little effect on broader investment mandates that do not often refer to ratings.
A key focus for bondholders is how much worse the US debt picture is made by budget negotiations. On Friday, five Republican lawmakers from the House budget committee voted against the tax bill, stalling its progress. On Sunday, the package narrowly passed the committee vote.
Trump had put pressure on his party’s lawmakers to vote in favour of the bill. “Republicans MUST UNITE behind, ‘THE ONE, BIG BEAUTIFUL BILL!’” he wrote on social media on Friday. “We don’t need “GRANDSTANDERS” in the Republican Party. STOP TALKING, AND GET IT DONE!”
The legislation, which includes hundreds of billions of dollars in new tax cuts that are not offset by changes in spending, is expected to increase the federal deficit, which stood at 6.4 per cent of GDP in 2024 — well above levels economists view as sustainable in the longer term.
“The bill is helping drive up the long end,” said Subadra Rajappa, head of US rates strategy at Société Générale.
A bigger deficit means more Treasuries issuance. Some investors moved to sell bonds in anticipation of extra supply and the potential inflationary impacts of the tax cuts.
The US has long been able to run large fiscal deficits because of its economic strength but also because of the structural role that the dollar and US government debt play in the global financial system. However, analysts have questioned the haven status of American assets as erratic policymaking from Washington unsettles big global investors.
The administration believes the tax cuts will boost growth, raise revenues and lower the US’s deficit. But the Committee for a Responsible Federal Budget projects that the tax bill could add up to $5.2tn to the national debt over 10 years.
Other bond markets were dragged along with Treasuries. The 30-year UK gilt yield rose 0.08 percentage points to 5.48 per cent.
“The direct driver [of the bonds fall] is the Moody’s downgrade,” said Wei Li, head of multi-asset investments for China at BNP Paribas.
“[But] there are other more fundamental reasons to drive yields up . . . there’s still a lot of uncertainties around tariffs and inflation.”
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